United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 8-K/A
April 5, 1999
(January 20, 1999)
(Date of Earliest Event Reported)
----------------
INDUSTRIAL RUBBER PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Minnesota 333-46643 41-1550505
(State or other Commission file (I.R.S. Employer
jurisdiction of number Identification No.)
incorporation or
organization)
3804 13th Avenue East
Hibbing, MN 55746
(Address of principal executive offices) (Zip Code)
(218) 263-8831
(Registrant's telephone number, including area code)
Not applicable
(Former, name, former address and former fiscal year,
if changed since last report)
Item 7. Financial Statements and Exhibits.
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The Sonwil Products, Inc. d/b/a T. J. Products, Inc.
balance sheet as of December 31, 1998, and the
related statements of income, accumulated deficit and
statement of cash flows for the year then ended,
and the report of McGladrey & Pullen, LLC, independent
auditor, thereon, together with the notes thereto, are located
at pages 2 through 7 of this Report.
(b) PRO FORMA FINANCIAL INFORMATION.
The pro forma condensed combined balance sheet
(unaudited) as of December 31, 1998, the pro forma
combined statement of income (unaudited) for the year
ended December 31, 1998, and the notes thereto are
located at pages 8 through 12 of this Report.
1
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SONWIL PRODUCTS, INC.
d/b/a TJ PRODUCTS, INC.
FINANCIAL REPORT
DECEMBER 31, 1998
INDEX TO FINANCIAL STATEMENTS Page
Report of independent auditors 2
Balance sheet as of December 31, 1998 3
Statement of income for the year ended December 31, 1998 4
Statement of accumulated deficit for the year ended
December 31, 1998 4
Statement of cash flows for the year ended December 31, 1998 5
Notes to financial statements 5-7
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Sonwil Products, Inc.
d/b/a TJ Products, Inc.
West Jordan, Utah
We have audited the accompanying balance sheet of Sonwil
Products, Inc., d/b/a TJ Products, Inc., as of December 31, 1998,
and the related statements of income, accumulated deficit, and cash
flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Sonwil Products, Inc., d/b/a TJ Products, Inc., as of December 31,
1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting
principles.
As described in Note 5 to the financial statements subsequent
to year end the Company sold its assets to another company.
2
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McGLADREY & PULLEN, LLP
Duluth, Minnesota
March 4, 1999
SONWIL PRODUCTS, INC.
d/b/a TJ PRODUCTS, INC.
BALANCE SHEET
December 31, 1998
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash (Note 3) $ 37,428
Trade receivables 302,731
Inventories 271,096
Prepaid expenses 12,013
--- --------------------
Total current assets 623,268
--- --------------------
Equipment and Leasehold Improvements
Machinery and equipment 1,017,877
Automotive equipment 149,148
Office furniture and equipment 48,486
Leasehold improvements 6,922
----------------
1,222,433
Less accumulated depreciation 945,373
--------------------
277,060
-- --------------------
$ 900,328
=== ====================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current maturities of long-term debt (Note 3) $ 73,640
Due to related company 68,749
Accounts payable 244,361
Accrued expenses 37,415
--------------------
Total current liabilities 424,165
--------------------
Long-Term Debt, less current maturities (Note 3) 519,682
--------------------
Commitments (Note 5)
Stockholder's Equity (Deficit)
Common stock, no par value; authorized 50,000
shares;
issued 5,000 shares 5,000
Accumulated deficit (48,519)
---------------------
(43,519)
---------------------
$ 900,328
========================
See Notes to Financial Statements.
3
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SONWIL PRODUCTS, INC.
d/b/a TJ PRODUCTS, INC.
STATEMENT OF INCOME
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
Net Sales (Note 2) $ 2,929,162
Cost of Sales 2,523,852
---- -------------------
Gross profit 405,310
Operating Expenses 575,065
---- -------------------
Operating loss (169,755)
Nonoperating Income (Expense)
Interest income 3,803
Gain on sale of equipment 3,249
Interest expense (67,670)
---- -------------------
Net loss $ (230,373)
==== ===================
STATEMENT OF ACCUMULATED DEFICIT
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
Balance, beginning $ 189,354
Net loss (230,373)
Distributions (7,500)
--- ----------------
Balance, ending $ (48,519)
=== ================
See Notes to Financial Statements.
4
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SONWIL PRODUCTS, INC.
d/b/a TJ PRODUCTS, INC.
STATEMENT OF CASH FLOWS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities
Net loss $ (230,373)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 188,822
Gain on sale of equipment (3,249)
Changes in working capital components:
Increase in receivables (23,381)
Increase in inventories (27,862)
Decrease in prepaid expenses 1,184
Increase in accounts payable and accrued 72,206
expenses
----------------
Net cash used in operating activities (22,653)
----------------
Cash Flows from Investing Activities
Purchase of equipment (1,003)
Proceeds from sale of equipment 5,000
----------------
Net cash provided by investing activities 3,997
----------------
Cash Flows from Financing Activities
Principal payments on long-term borrowings (58,773)
Cash distributions (7,500)
Advances from related company 27,660
----------------
Net cash used in financing activities (38,613)
----------------
Net decrease in cash (57,269)
Cash:
Beginning 94,697
----------------
Ending $ 37,428
================
Supplemental Disclosures of Cash Flow Information
Cash payments for interest $ 66,201
================
See Notes to Financial Statements.
SONWIL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: The Company is engaged in the business of
producing rubber linings, rubber moldings and urethane moldings for
5
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the mineral processing, electric power, paper, and U.S. military
and aerospace industries to customers located primarily in the
Rocky Mountain area of the United States. The Company extends
credit to its customers, all on an unsecured basis, on terms that
it establishes for individual customers.
A summary of the Company's significant accounting policies follows:
Cash: The Company maintains its cash in accounts which, at times,
may exceed insured limits. The Company has not experienced any
losses in such accounts.
Inventories: Inventories are stated at the lower of cost or market
and consist primarily of raw materials. Cost is determined by the
first-in, first-out method.
Equipment and leasehold improvements: Equipment and leasehold
improvements are stated at cost. Depreciation is computed on the
straight-line method over seven years.
Income taxes: The Company, with the consent of its
stockholder, has elected to be taxed under sections of federal
income tax law, which provide that, in lieu of corporation income
taxes, the stockholder separately account for the Company's items
of income, deductions, losses and credits. As a result of this
election, income taxes have not been recognized in the accompanying
financial statements.
Revenue recognition: The Company recognizes revenue upon shipment
of product. Returns and allowances are recorded in the period the
need for such is identified.
Disclosures about fair value of financial instruments: The carrying
amount of current assets and liabilities approximates fair value
because of the short maturity of those instruments. The carrying
amount of long-term debt approximates fair value since long-term
debt has an interest rate which fluctuates with the prime rate.
Use of estimates in the preparation of financial statements: The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2. Major Customer
The Company has a major customer which accounted for approximately
24% of net sales. Accounts receivable from this customer amounted
to approximately $42,300 as of December 31, 1998.
6
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Note 3. Long-Term Debt
Long-term debt as of December 31, 1998 is as follows:
- --------------------------------------------------------------------------------
Note payable, bank, due in monthly installments of
$9,858 including interest at the bank's prime rate
(8.75% at December 31, 1998) to September 2001, at
which time the remaining balance is due, collateralized
by all cash accounts of the Company and real estate
owned by the stockholder and guaranteed by the $ 593,322
stockholder
Less current maturities 73,640
--- ----------------
$ 519,682
=== ================
In connection with the bank note payable, the Company has agreed,
among other things, not to: (1) permit total liabilities to net
worth to exceed 1.75 to 1; (2) permit a ratio of earnings before
interest, taxes, depreciation and amortization to current
maturities of long-term debt to be less than 1.5 to 1; and (3)
incur additional debt. The Company was in violation of certain
covenants as of December 31, 1998. Subsequent to year end the
outstanding balance on the bank note was paid in full with proceeds
from sale of the business as described in Note 5.
Note 4. Leases and Related Party Transactions
The Company leases production facilities from DGW Enterprises,
L.C., a company owned by the stockholder, under the terms of a
five-year operating lease expiring October 2001. Lease payments
amounted to $150,000 for the year ended December 31, 1998. The
lease provided that the Company pay all utilities, property taxes,
and insurance over certain amounts. Subsequent to year end the
lease agreement was terminated in connection with the sale of the
business as described in Note 5.
The Company also leases a vehicle and machinery and equipment under
short-term operating leases.
Total rent expense, including rent paid to a related party,
amounted to $177,258 in 1998.
The Company has a payable to DGW Enterprises, L.C. of $68,749 at
December 31, 1998.
Note 5. Subsequent Event
On January 20, 1999, the Company entered into an agreement to sell
primarily all of its assets including inventory and equipment for
approximately $2,260,000. The Company expects to realize a gain on
the sale of approximately $1,652,000. The stockholders entered into
a long-term noncompete agreement with the purchaser.
7
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma condensed financial statements presented
on the following pages are based on the historical financial
statements of the Company and reflect the pro forma effects of
the acquisition of Sonwil Products, Inc., d/b/a TJ Products, Inc.
on January 20, 1999.
The pro forma adjustments have been applied to the historical
financial statements of the Company for the year ended December 31,
1998. The acquisition will be accounted for using the purchase
method of accounting. For purposes of the pro forma statements,
the purchase price of the assets of $2,259,040 has been allocated
to the acquired net assets based on information currently available
with regards to the values of such assets. The cost of property
and equipment has been allocated based on a current appraisal. As
such, final adjustments to recorded amounts may differ from the pro
forma adjustments presented herein.
The unaudited pro forma condensed balance sheet is presented as if
the acquisition had occurred on December 31, 1998. The unaudited
pro forma statement of income for the year ended December 31, 1998,
was prepared as if the acquisition had occurred on January 1, 1998.
These pro forma financial statements are not necessarily indicative
of the financial position or results of operations that might have
occurred had the acquisition taken place at the beginning of the
period or as of December 31, 1998, or to project the Company's
financial position or results of operations at any future date or
for any future period. The pro forma statements should be read in
connection with the notes thereto.
8
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INDUSTRIAL RUBBER PRODUCTS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA BALANCE SHEET
December 31, 1998
Historical Adjustments As Adjusted
- --------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 2,715,966 $ (2,259,040) (1a) $ 96,926
(360,000) (2)
Marketable debt securities 1,642,784 _ 1,642,784
Receivables 1,201,564 _ 1,201,564
Inventories 408,731 349,391 (1b) 758,122
Prepaid expenses and other 9,649 (1c)
current assets 190,996 360,000 (3) 560,645
--------------------------------------------------
Total current assets 6,160,041 (1,900,000) 4,260,041
--------------------------------------------------
Deferred Taxes and Other 366,050 366,050
Assets -
--------------------------------------------------
Property and Equipment 3,072,119 1,485,475 (1d) 4,557,594
Less accumulated 1,372,420 - 1,372,420
depreciation
--------------------------------------------------
1,699,699 1,485,475 3,185,174
--------------------------------------------------
Intangibles 414,525 (1e) 564,525
-
150,000 (2)
--------------------------------------------------
$ 8,225,790 $ 150,000 $ 8,375,790
==================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of
long-term debt $ 174,263 $ 30,000(2) $ 204,263
Accounts payable 485,493 - 485,493
Accrued expenses 547,034 - 547,034
----------------------------------------------------
Total current liabilities 1,206,790 30,000 1,236,790
----------------------------------------------------
Long-Term Debt, less current 329,108 120,000(2) 449,108
maturities
----------------------------------------------------
Stockholders' Equity
Common stock, $.001 par value;
authorized 25,000,000 shares;
issued 4,194,000 shares 4,194 - 4,194
Additional paid-in capital 5,605,832 - 5,605,832
Retained earnings 1,090,605 - 1,090,605
----------------------------------------------------
6,700,631 - 6,700,631
Less cost of shares reacquired 10,739 - 10,739
----------------------------------------------------
6,689,892 - 6,689,892
----------------------------------------------------
$ 8,225,790 $ 150,000 $ 8,375,790
====================================================
See Notes to Unaudited Pro Forma Balance Sheets.
9
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INDUSTRIAL RUBBER PRODUCTS, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA STATEMENT OF INCOME
Year Ended December 31, 1998
Industrial Sonwil Purchase
Rubber Products, Products, Inc. Accounting
Inc. Historical Historical Adjustments Pro Forma
- --------------------------------------------------------------------------------
Sales $ 9,981,268 $ 2,929,162 $ - $12,910,430
Cost of Sales 7,784,754 2,523,852 130,296(1) 10,438,902
----------------------------------------------------------
Gross profit 2,196,514 405,310 (130,296) 2,471,528
27,635(2)
Operating Expenses 2,552,434 575,065 30,000(3) 3,185,134
----------------------------------------------------------
Operating income (loss) (355,920) (169,755) (187,931) (713,606)
----------------------------------------------------------
Nonoperating Income
(Expense)
Interest and other 245,713 7,052 (90,052)(5a) 162,713
income
Interest expense (138,247) (67,670) 67,670 (4)
(73,620)(5b) (211,867)
---------------------------------------------------------
107,466 (60,618) (96,002) (49,154)
---------------------------------------------------------
Income(loss)
before income (248,454) (230,373) (283,933) (762,760)
taxes
(80,000)(6a)
Federal and State Income (337,000) - (113,600)(6b) (530,600)
Taxes
---------------------------------------------------------
Net income (loss)$ 88,546 $ (230,373) $ (170,333) $(232,160)
---------------------------------------------------------
Unaudited Pro Forma
Information
Income (loss) before $ (248,454) $ (230,373) $ (283,933) $ (762,760)
income taxes
Provision for income (80,000) (80,000) (113,600) (273,600)
taxes
---------------------------------------------------------
Net income (loss)$ (168,454) $ (150,373) $ (170,333) $ (489,160)
---------------------------------------------------------
Basic earnings (loss) $ (0.04) $ (0.13)
per share
-------------- ----------------
Diluted earnings (loss)$ (0.04) $ (0.13)
per share
-------------- ---------------
Weighted average shares
outstanding 3,803,651 3,803,651
-------------- ---------------
See Notes to Unaudited Pro Forma Statements of Income.
10
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INDUSTRIAL RUBBER PRODUCTS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA BALANCE SHEETS
- --------------------------------------------------------------------------------
Adjustments were made as follows:
(1) Record purchase of certain assets
and of Sonwil Products, Inc.:
(a) Purchase price $ 2,259,040
=======================
Allocated as follows:
(b) Inventories $ 349,391
(c) Prepaid expenses 9,649
(d) Equipment and leasehold
improvements
Machinery and equipment $ 1,352,840
Office furniture and equipment 41,335
Automotive equipment 80,300
Leasehold improvements 11,000 1,485,475
------------
(e) Goodwill 414,525
---------------
$ 2,259,040
======================
(2) Record five-year consulting
agreement with previous owner $ 150,000
======================
(3) Record prepaid salary paid to
previous owners under
employment agreement $ 360,000
======================
11
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INDUSTRIAL RUBBER PRODUCTS, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
Adjustments were made as follows:
(1) Eliminate depreciation applicable to historical
operations of Sonwil Products, Inc.: $ (190,026)
------------------
Add:
Machinery and equipment $1,352,840 depreciated over 270,568
10 years
Office furniture and equipment $41,335 depreciated 16,534
over 7 years
Automotive equipment $80,300 depreciated over 5 32,120
years
Leasehold improvements $11,000 depreciated over 10 1,100
years
-----------------
320,322
-----------------
Net increase in depreciation $ 130,296
=================
(2) Record amortization of intangible of $414,525
over 15 years $ 27,635
=================
(3) Record payment of five year noncompete agreement
with previous owner at $30,000 per year $ 30,000
=================
(4) Eliminate interest expense applicable to
historical operations of Sonwil Products, Inc. $ 67,670
=================
(5) Record interest expense and reduction of interest
income on proceeds used for purchase
(a) Record reduction on interest income on cash used
in financing purchase price of acquisition $ 90,052
=================
(b) Record interest expense on amount financed for
purchase to date before proceeds from IPO received $ 73,620
=================
(6) Adjust income taxes
(a) Record income taxes on Sonwil Products, Inc. for
the year ended
Pretax loss $ (230,373)
Tax benefit (80,000)
==================
(b) Adjust income taxes on the Company
Pretax loss as adjusted $ (283,933)
Tax benefit (113,600)
=================
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(c) EXHIBITS
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INDUSTRIAL RUBBER PRODUCTS, INC.
(Registrant)
Date: April 5, 1999 /s/ John M. Kokotovich
--------------------------------
John M. Kokotovich
Chief Financial Officer
